MILAN/FRANKFURT (Reuters) - The European Commission on Friday gave preliminary approval for an Italian plan to wind down two ailing Veneto-based regional lenders with state money in a move that may allow Rome to solve its latest banking crisis on its own terms.

FILE PHOTO: The logo of Veneto Banca bank is seen in Venice, Italy, January 31 2016. REUTERS/Alessandro Bianchi/File Photo

Italy plans to start liquidation proceedings for Banca Popolare di Vicenza and Veneto Banca on Saturday, a source close to the matter said, issuing an emergency decree that will effectively remove one its biggest banking headaches by splitting the two lenders’ assets into “good” and “bad” banks.

The country’s top retail bank Intesa Sanpaolo (ISP.MI) is set to buy the good assets for one euro, leaving the state to foot the bulk of the bill for losses stemming from the banks’ bad loans, legal risks and restructuring costs.

“EU state aid rules allow for the possibility of granting state support in these kind of situations,” the European Commission, which must rule on the use of state money, said in a statement.

It added it was in constructive discussions with Italian authorities.

“Good progress is being made to find a solution very soon.”

The Italian government has been scrambling to prevent the two lenders from being wound down under European banking rules designed to stop the use of state money in banking crises.

Rome feared that under those rules losses could have been imposed on senior bondholders and large depositors, a politically unpalatable prospect in the run-up to elections next year.

Instead, under the Italian plan only junior bondholders and shareholders will be hit, but the cost for taxpayers is likely to be hefty.

With the two banks’ soured or risky debts totalling more than 20 billion euros ($22.4 billion), one banker said the government would put in 5 billion euros, while some Italian media reports on Friday said the final bill could be as high as 12 billion euros.

The emergency decree to be approved on Saturday will “create the conditions” for a sale of the banks’ good assets to Intesa, the source said.

“The sale will allow the regular functioning of the banks’ branches on Monday morning,” it said, adding the terms of the transaction will be made public in coming days.

Earlier the European Central Bank said the two banks, which have a capital shortfall of 6.4 billion euros and are bleeding deposits, were failing or likely to fail, setting in motion the process that will lead to them being wound down.

“The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward,” it said in a statement.

Pressure on Rome to find a solution for the two Veneto lenders had increased since Spain’s Banco Popular POP.MC was rescued by Santander (SAN.MC) this month in a deal orchestrated by European authorities.

In Popular’s case, no state money was used and Santander is seeking around 7 billion euros of capital from shareholders to help it take on Popular.

The Italian plan instead takes advantage of an exception to EU bank rules that allows the use of routine insolvency proceedings with banks not considered systemically important, allowing the process to be handled by the member state.

The plan has sparked criticism from some European officials who said Italy was being allowed to cut corners, while at home, opposition politicians have also criticised the scheme put forward by the government.

“Intesa gets a free gift, the state takes on all the bad stuff and the taxpayer pays,” Renato Brunetta, parliamentary leader for former prime minister Silvio Berlusconi’s Forza Italia (Go Italy!) party said on Thursday.

“Did we really need to take so much time to come up with such a rubbish solution?”

($1 = 0.8936 euros)

Additional reporting by Francesca Piscioneri and Giuseppe Fonte in Rome, Agnieszka Flak in Milan and Foo Yun Chee in Brussels